Thursday, September 11, 2008

Secular, cyclical or just a throw rug?

If a small strange woman with a Fargo twang can deal with a bear, so can calm investors.

Yesterday as I wrote about the disconnect between the market and the economy in the short term I recalled one the the most interesting articles I've read some years ago which put that fact into perspective. Despite the idea that hatched in the 1990's and seemed to find its way back to popular conventional wisdom, the stock market is not a steady climb to heaven. In fact the alternating longer term (secular) bull and bear cycles tend to be the better part of a generation long. I believe we are midway into one of those long hiatuses.

The animal spirits that can hardly be held back during the times of investment plenty can bearly be roused in the times of dormancy. Interestingly enough there is little direct correlation between the nations economic growth and the market's performance.

If one looks closely at the period from the end of 1964 until the end of 1981, the Dow Industrial Index in that seventeen year period gained the princely sum of less than one single point, exactly 1/10th of 1%. Try retiring on that growth or putting a child through college without saving. During that time, the United States Gross Domestic Product (GDP) grew 373%.

Fast forward to the next seventeen year period, from the end of 1981 to the end of 1998. During that span the Dow Average advanced 8306 points, 949%, while the economy grew half as fast, 177%. Everyone's retirement and college educations looked pretty secure for those who hadn't gone into hibernation earlier.

The nearly ten years beginning at the end of 1998 haven't been quite as bad, with a gain of 24% or 2.4% per year, although all of the gain actually came in the first year of the period.

There will be periods that present opportunities for investment gains but it is going to take a little work. Neither throwing darts nor throwing one's hands in the air will help.